Exclusive Interview With Google's Eric Schmidt

CNBC.com

Wednesday, 30 Apr 2008 | 1:58 PM ETCNBC.com

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CNBC's Maria Bartiromo sat down with Google CEO, Dr. Eric Schmidt Tuesday at the Milken Conference in Los Angeles to discuss Google's growth and U.S. slowdown, the possibility of a Microsoft acquisition of Yahoo!, online advertising growth rates, Google's European stronghold and Google's stock, and other topics.

Here is the full, unaltered transcript of that interview:

Maria Bartiromo, host: Eric, thanks so much for joining us.

Dr. Eric Schmidt, Google CEO: Thank you for having me on again.

Bartiromo: Let's begin with this debate that seems to be brewing on WallStreet about growth. So the company grew 46 percent in the third quarter, 40percent in the fourth quarter, 30 percent in the next quarter, and thensequentially 1 1/2 percent when you look quarter to quarter. How insulatedwould you say is Google to the economic slowdown or recession?

AP

Google Headquarters

Schmidt: Well, the numbers you're using are year over year, quarter over quarter in the US. Globally, of course, we had good growth, and the US numbers are masked by the fact that, a year ago, we had a very strong quarterly growth of that quarter. So the real growth rate in the US is good,although overall growth rates are slowing, as they have for years. Just because of the scale and size of what we operate. The business has continued to be good.

Bartiromo: OK, because when you get to a certain size, it's really hard tosort of grind down more market share when you've already got 70 percent or getthat much bigger, given the fact that the company is getting--you're a largebusiness.

Schmidt: But we have--we have multiple ways in which we grow. Ofcourse, more people use the Internet, more people are using electroniccommerce on the Internet, more people are clicking on the ads, and also our adtechnology is getting much, much better. And it's really any one of thosewill push us over the top in any given quarter; sometimes they all cometogether. We don't seem to be very sensitive to macroeconomics, at leastright now. We don't seem to be very sensitive to things like recession. Butwe're very sensitive to how quickly do we bring in the new product improvementor something like that.

Bartiromo: The comScore data took everybody's estimates down, and this wholedebate about whether it was accurate or not. How can you ensure that thegrowth occurs, even if people pull in their spending, if perhaps advertisersslow down on the budgets? I mean, is it fair to say that the hypergrowth of2004 to '07 is--has been seen?

Schmidt: Well, as I said, if you think about it over a five- or six- orseven-year period, growth rates are slowing, as they have to. So I don'tthink it's a big shift. It's not, you know, today it was one way and tomorrowit's another. In our case, we focus on quality, and we have a very simplemodel. If we show fewer ads that are more targeted, those ads are worth more.So we're in this strange situation where we show a smaller number of ads andwe make more money because we show better ads. And that's the secret ofGoogle.

Bartiromo: Yes, that's what Mary Meeker was saying. She's saying, `Look, itcould be that they're actually benefiting from a recession because they'remonetizing the ads better.'

Schmidt: There's been--you you know, if you were running a businesstoday, you would be looking very carefully at where is your marketing spendgoing? And we think that you'll choose to put your marketing spend on thething that's most measurable, the thing that's most, you know--because you canalways defer a branding campaign that may or may not work, but you want to getthose customers and those leads right now, and that's what we do.

DoubleClick Integration

Schmidt: Well, it just started. It started about three weeks ago. Andwhat we're doing is we're taking their products and our products andintegrating them so that people have better tools, advertisers have more,literally, ads, and publishers have more spots that they can publishinformation into. So it's the combination of all that that we've been waitingfor so long, and it's under way. It takes six months to get all the productstogether.

Bartiromo: So you think that the integration process will take about sixmonths?

Schmidt: It's on the order of that. And, of course, at Google ,everything is a try. We try this, we try that, we see what works. The earlyindications are that we'll be largely complete within that period.

Bartiromo: It's no secret that Google owns search, but what about the displayads? Is it--is it fair to say that's sort of up for grabs? You know, you'vegot DoubleClick, Microsoft has aQuantis. It's up for--up for grabs, that part of the business.

Schmidt: Well, it's fair to say that that Google is not the leader indisplay ads, but our customers want to be able to purchase text ads anddisplay ads and other advertising in one purchasing bundle, and thecombination of the tools that we're developing, plus the DoubleClickintegration acquisition and so forth, allows us to offer a single product forthose advertisers. So we think that will help us with our display adscompetitiveness. We think our technology is better. And so really now it's aquestion of earning those customers' respect and knowledge.

Bartiromo: So how do you ensure that that was actually the right acquisitionand not just go it alone, do it on your own?

Schmidt: Well, we had tried that. But the customers really liked theDoubleClick product, and in our surveys we concluded that in one ofthese--this was one of those cases where another company had simply built abetter product, which is why we went forward with the acquisition.

Bartiromo: Tell me what you're doing with Yahoo! in terms of testing. Onthe earnings call last time, you said you're setting up ads there. How's itgoing? What's involved?

Schmidt: Well, the long and short of it is that we did a test for abouttwo weeks, which has since ended, where Yahoo! took a small percentage oftheir ads and replaced them by ours. We did this as part of a commercialconversation, which I obviously cannot go into, but it's one of the strategicoptions that we believe Yahoo! is considering at this time.

Bartiromo: Now, of course, after that, I guess the Department of Justiceannounces that it's, you know, doing an inquiry about this. Have you heardfrom the Department of Justice on this?

Schmidt: Well, again, without going into the specifics, you shouldexpect that in all of these possible transactions, all of the regulatorybodies will be reviewing them. If there were an acquisition of Yahoo!, forexample, the Department of Justice would also be doing a review. And theanti-trust laws allow the government--and I think properly so--to look at bothcommercial deals as well as acquisitions.

Bartiromo: What kind of a combination would you like to see with Yahoo!?What kind of a partnership would you like to see?

Schmidt: Oh, well, we actually enjoyed working with Yahoo!. We alsocompete with them. They're a well run and, I think, impressive company.We've primarily been concerned about the possibility of a Microsoftacquisition of Yahoo! because of Microsoft's history and because of theassets that Yahoo! has are quite valuable. And we actually think that in thewrong hands, they could be used in the wrong way.

Bartiromo: What do you mean, Microsoft's history?

Schmidt: I think people are aware of the anti-trust trial from 10 yearsago. Microsoft has a long history in that area.

Bartiromo: Yeah, you can bet, I guess, who tipped off the DOJ about the phonecall that was made, Steve Ballmer or somebody from that side.

So what do we know about Microsoft and Yahoo!? Tell me this. I mean, I knowthat, you know, we're waiting on possible news from Microsoft, possibly, ahostile--we don't know what's going to happen next. But what kind of achallenge would Microsoft/Yahoo! be for Google?

Schmidt: Well, today we actually do not know what's going on. We readin the press that there's discussions and we'll see what they decide to do.If they go ahead and the merger's ultimately successful, it would be possiblefor Microsoft to integrate some of the properties and essentially eliminateconsumer choice, particularly in electronic mail, instant messaging, thethings where they have 80 or 90 percent market share, and that's a sweet spotfor Microsoft in its ability to eliminate choice.

Bartiromo: Mm-hmm. And, of course, Google has been getting all these newkiller apps, whether it's Gmail or Maps or, you know, spreadsheets.Ultimately is the game to compete direct, head on, with Microsoft?

Schmidt: Well, Google is actually trying to be an innovator, and we'realways concerned about competition. We have found that if we can simplyinvent a brand-new product that really solves a problem that really doesmatter to you, we can get your business, we can get your attention, we can getyour traffic and your customers or what have you. We're trying in a new thingcalled cloud computing to offer very powerful Web services that do the commonthings--e-mail, word processing and so forth--where the data's kept in thecloud, it's kept by somebody else, it's managed by professionals. You don'tneed to worry about where you keep all that information. We like that model alot. We're getting traction. It is a competitive threat to other companies,but we think it's a technological breakthrough.

What If Microsoft Goes Hostile?

Bartiromo: How will you respond if Microsoft goes hostile?

Schmidt: Well, a lot will depend on whether their strategy issuccessful. In the short term, we have pointed out the possibility of a badoutcome, but it really depends on what happens in the hostile.

Bartiromo: Do you have any sense of how these things go? I mean, can they goin the open market, buy the stock, and then just create a proxy battle?

Schmidt: All I know is what I've read in the press, which is thatessentially you replace the board and you force--you force the deal.

Bartiromo: Let me ask you about YouTube and MySpace. YouTube has thesephenomenal growth rates. What do you think is behind that?

Schmidt: Video is powerful. And it's amazing. You know, we started offwith Mentos and the other sort of fun videos, and now people, because theyhave so many digital cameras, are essentially uploading everything.Furthermore, we're beginning to see glimpses of significant professionalcontent on YouTube. People are using it--because there's such a large reach,they're learning how to reach that audience. We're working but have not yetin my view gotten a breakthrough around monetization. So while we have lotsand lots of traffic and we have lots and lots of interesting and creativepeople and all sorts of controversies--we're blocked in countries, so on andso on--I don't think we've quite figured out the perfect solution of how tomake money, and we're working on that. That's our highest priority this year.

Bartiromo: Which is a huge priority, clearly. A lot of people feel like thisis an amazing opportunity for you. So, as far as monetizing that business onYouTube, do you think that takes a year? Does it take the next five years?What's your time frame on that?

Schmidt: We believe the best products are coming out this year. Andthey're new products. They're not announced. They're not just puttingin-line ads in the things that people are trying. But we have a number--and,of course, Google is an innovative place. The Yahoo! team are trying variousnew forms of advertising, ones which are much more participative, much morecreative, much more--much more interesting in and of themselves. Googlebelieves that advertising itself has value. The ads literally are valuable toconsumers. Not just to the advertisers, but the consumers.

Bartiromo: They want to look at them.

Schmidt: When they're targeted. When they're the right ad for whatyou're doing or what you care about.

Bartiromo: Mm-hmm. But, you know, it gets me to MySpace. Some people feellike, when you look at the MySpace part of the business, that's really wherepeople are looking at, or feeling a bit of an economic downturn. Let me askyou about that. The deal involving revenue promises, is that going to impactmargins in the coming two years?

Schmidt: Not materially in that sense. We have pointed out, and I'llrepeat again, that the whole social networking space has been harder for us tomonetize--that is, develop advertising businesses again--than some of theother--than some of the other spaces that we're in. It has to do what peopleare doing. When you think about it, you're in a social network, you'relooking at people's photos, you're figuring out where your friends are.You're not as likely to be purchasing a new car at the same time or purchasingclothes or purchasing a book or what have--whatever business that you're in.So the development of the advertising tools and techniques, literally theplatform, has been more difficult than we have thought. But we're working onit, and we're hopeful.

Bartiromo: You've got $12 billion in cash right now?

Schmidt: A little more than that.

Bartiromo: What are your plans for that money? A lot of people say, `Look,the company's doing well. Growth is still continuing very strongly, global inparticular. Why not pay a dividend out? Why not buy back stock?

Schmidt: We love watching that cash sit in a well-managed bank and notget lost.

Bartiromo: So you could categorically rule out, no dividend coming?

Schmidt: Well, first this: We never rule anything out. But right nowwe're happy to let the cash accumulate. The cash represents a strategicoption for the future. As you know, we had the luxury of entering thewireless auction. And we did not win the auction, but our financial resourcesallowed us to credibly and seriously enter an auction for 4.65 billion.Couldn't have done that without the cash.

Bartiromo: What did you get out of that, though, Eric?

Schmidt: Well, from a corporate perspective, we participated insomething important. From a consumer perspective, we know that ourparticipation helped in making sure that the networks remained open. Soconsumers get choices. What's better than that?

Mobility Is Where It's At

Bartiromo: Yeah, and the FCC was happy about that.

Mobile. A lot of people say mobility is where it's at. You've said,actually, I've heard you on conference calls saying that this is one of thebig priorities for the company. How do you envision this? Tell me whatyou're looking for.

Schmidt: First place, everyone I know, everyone you know carries amobile phone. And it's true in every country.

Bartiromo: And I'm not carrying my PC, by the way.

Schmidt: And most people in most developed countries have a roughly 100percent coverage of mobile phones. So it really is a tremendous phenomenon.Over the next three or four years, there'll be more than another billion or somobile phones added. Eventually our numbers indicate that there'll be five orso billion mobile phones in a world of six billion or so. People, this is aphenomenon. It's an unprecedented reach, even greater than, for example,television, or even electricity in some cases. So that's a platform that wecan exploit. Our mobile phone, both search traffic as well as advertising isgrowing very rapidly, and we think people will do more and more interestingthings in mobile phones. And, I mean, small phones, big phones, big screens,things that don't look like a phone, things which are mobile.

Furthermore, the telecommunications industry is helping because they'redeploying billions of dollars of literally excess data capacity so thesethings will have fast networks wherever I go. One of the greatest things forme is whenever I fly somewhere, I open up and I open up my iPhone or myBlackBerry, and, boom, there's everything in my world as I've landed in acountry I've never been in. It's a remarkable achievement.

Bartiromo: Yeah. What needs to happen before we actually get to that worldthat you're talking about? In other words, do we need to see the providerscreate different screens? I mean, do you need a larger screen to access someof this data? How do we get there?

Schmidt: Well, one of the problems is we haven't figured out a way tochange finger sizes. We just haven't...

Bartiromo: Right.

Schmidt: There's no solution to that.

Bartiromo: Right.

Schmidt: We'd like to, but we haven't done it. And people don't like tokind of go like this. So you need a certain size screen. But there's othertechnology. For example, the processors in the phones have gotten faster.The batteries have gotten longer last--longer lasting. The screens havegotten brighter. The whole device has gotten lighter. So all of that hasbeen happening while people have been talking about this. We know that thesethings are working now. We know because we measure it that there's been ahuge increase in maps, Google Maps, hugely successful. These phones haveGPSes in them. So when I want to go to the equivalent of a Starbucks, I justtype "Starbucks," it says it's over there. For me, that's just a huge--a hugeimprovement. And that service is available almost everywhere in the world.

Bartiromo: That's amazing. Let's--that transitions right to the rest of theworld. Global has been really the hot spot for Google. Tell me how you keepthat going. Where are the biggest opportunities for Google right now outsideof the United States?

Dr. Schmidt: Well, first place, the Internet is growing faster outside theUnited States than in the United States. Also advertising online growth ratesare higher outside the United States than they are in the United States.You've got--and of course you have a weak dollar strategy--because the US hasa very weak dollar--so that also helps. For all of those reasons, revenueoutside of the United States should grow dramatically over the next while, andthat's great.

In our case, the biggest difference--and, in fact, perhaps the onlydifference--between people in the US and other people is language. Other thanthat, simple rule: Everybody wants the same thing. They want fashion, theywant information, they want products, they want e-commerce, they want it now,they want to have fun, they want to use credit cards or debit cards. So wework very hard to make that true globally. I think most of the large,successful US corporations, the ones that you certainly cover all day, all aregoing to see that kind of growth if they'll well positioned internationally.

Bartiromo: So when you look around the world, what's the most important, sortof richest area for you right here?

Schmidt: Well, for us, of course, Europe has been our stronghold for along time. And Europe is just very, very strong for Google. They haverelatively higher market share, they're very sophisticated consumers, and avery mature advertising rate. If you look at the global advertising market,it's the United States, Japan, China, Britain, France and Europe--and GreatBritain. Those are the sort of the big five or six. Well, of course, we'redoing very well in Europe, we're doing well in Japan, and we've been in theprocess of entering China for a while, and we're growing there nicely.

Bartiromo: What's happening there, though? You're number one in every marketexcept a handful in Asia. How do you break in, and really with a solidfoothold.

Schmidt: Well, in each case, they're different. In China, of course,there's all the issues of regulation and censorship. We delayed our entry forgood reasons, and as a result we're not number one there. In some of theother countries, it's because we didn't get the language right. It turns outAsian languages often have what you and I would think of are nonsensical waysin which words are put together. So, for example, all the words in Thai areput into one very long sentence. They don't have word breaks. So developingthe technology to do that right and then search and index against it took us alittle while longer. We've now addressed that, so we think we should do wellnow.

Bartiromo: Fascinating. So what's the biggest challenge that you're facingtoday?

Schmidt: In Google's case, I think it's internal. It's the ability tomanage the creative process, deal with the complexity in what is a relativelylarge company, in terms of people, who's doing what. We have 50 developmentcenters all around the world, people in different time zones, `Are you doingthat? Are you doing that? Do I work with you? How do I check in my code?'Those sorts of things.

Managing Employee Growth

Bartiromo: And for a long time, people were saying, `Look, you know, Googlehas this incredible campus, and, you know, spending money, and reallyshowering employees, making sure that people are happy there.' Are youbeginning a new process of managing employee growth right now and managingexpenses more aggressively than you have in the past?

Schmidt: Well, certainly not our benefits, per se. Every day I turnaround, there's some new benefit that we've come up with for our employees.It's part of our culture; we're happy to do that. And, of course, we havegross margins to afford it. So higher gross margins is one of theexplanations. We have slowed our head count growth for a couple of reasons,but the biggest reason is it began to feel like we really didn't have a goodsense of what people were doing. The systems in the company, literally who'sdoing what, what are they doing, seemed to lag our ability to hire these greatpeople. So we slowed it a little bit. But we're still going to hire somenumber of thousand people this year.

Bartiromo: Let me--let me go back to something on the DoubleClickacquisition. Are you seeing any pushback from some of the advertisers whosay, `Look'--the ad agencies who say, `We're already spending a ton of moneyon Google. Why do we need to spend more on all this other stuff away fromsearch?' How are you going to get them to devote more money to display, toaudio, to print and TV ventures, which are--and everything else you're--andthe display ads, obviously.

Schmidt: Because we earn it. Because you can measure it. We never wantpeople to give us--give us money that we don't earn and that we can't provethat they--that they--that it really provides value. That's not a goodbusiness for us. So as we enter these markets, we hope to say, `We have thetools that can show you that if you put this display ad out there, you reallywill get the sale.' And we have ideas, we have new research in how to do thatin a closed loop way that is phenomenal. So our innovation model is in verycategory of ads, not just text ads, to show real return, real sales, and wethink we can do that. And if we do that, we'll get the business. And if wecan't do it, we shouldn't get the business.

Bartiromo: Right, because it's so measurable. That's why you don't reallysee a real dry up in the advertising during a recession.

Schmidt: Which is...

Bartiromo: Would you agree with that?

Schmidt: That's our hope. Our hope is that, again, in a recession,people would say, `Look, I'm going to put my money where I know my money'sbeing well spent.' Now, we don't know that we're in a recession, but if wewere, we hope that's what will happen.

Bartiromo: Now, earlier you said, `Look, growth levels have to slow,obviously.' What's appropriate then? I mean, when you say--I mean, investorsare saying, `Look, is this company insulated? Is it not insulated?' So yousay of course growth levels have to slow. To what?

Schmidt: Well, we don't know, but obviously, we don't plan to a growthlevel, we plan to an innovation level. Our idea is you just keep inventingnew stuff, and it grows as quickly as it can. And there's some capacity withwhich we can deliver these to customers and that they can adopt them. And, ofcourse, they have to do work. They have to learn how to use new tools, wehave to talk to them, there's a lot of selling and marketing involved. Itjust doesn't happen automatically. Here's a new idea. People have to becomfortable with it. But once they are, we've found that growth rate isquite...(unintelligible).

The Most Innovative Thing Out There Today

Bartiromo: As a steward of technology and innovation your entire career, whatwould you say is the most innovative thing out there? What's the next bigthing, from your standpoint?

Schmidt: I've always thought that the scariest piece of innovation isknowledge understanding and language translation. I don't understand how itworks, but to watch a computer--literally watch it--read something in English,dissect what it's about, translate it into a language that I don't speak andhaving that other person say, `Wow, that's incredible,' to me, that's magic.And it isn't magic, it's just very good computer science, very good artificialintelligence, very good physics. And that's where we are. So the things thatare most impressive to me are the things where the computer does somethingthat nobody could do, literally translate things 100 language in parallel,summarize something for me, take me to something which I didn't know I wasinterested in but knows that I cared about it. And we're right on the cusp ofthat.

Bartiromo: Eric, your stock went from $750 to $450 in a very short period oftime. What do you think happened?

Schmidt: I don't know. We don't really focus on short-term movement ofthe stock price. We said, since the company went public, that we're in thisfor the long term, and we want shareholders to be with us. These short-termfluctuations in outlook and so forth are not something that we focus on. Wedon't talk about it. We're really focused on this huge opportunity before us,which is automating the trillion-dollar industry that is advertising. Wewon't get all of that, for sure, but we should be able to get a significantpart of that over the lifetime, certainly of my service to the company. Andour goal is to build this into an institution that lasts for many, many yearsand is the greatest innovator in technology in this space.

Schmidt: Well, our number one priority is end-user--end-user happiness.Literally, are people happy with the results that they get using Googlesearch? So it's literally search, and every day we bring out new improvementsand indices that are--taxonomies that are understanding of language, morecontent, bigger--all of the things that make Google such a great searchexperience. That's our number-one priority, even more important, for example,than advertising. The way we pay for it, of course, is by improving ouradvertising solutions, as you described. That's what we do in the core.

Our next big play is in this applications phase, where we think people spend alot of time online with information, and we can help them, whether it's theire-mail, which is an easy one to understand, but what about their personaldata? What about their spreadsheets and their calendar, keeping it all there?And we can help them search. We can solve the problem of `how do I live inthis digital lifestyle?' If we do that right, they can do it on mobile phonesas well as at home, in their office and on a Mac and on a PC, and it all worksgreat.

Bartiromo: This is all fantastic for the consumer. It's free, they've gotaccess to all this stuff, they don't have to pay for it. What about...

Schmidt: It's a pretty good model.

Bartiromo: Yeah.

Schmidt: It works pretty well.

Bartiromo: What about the corporate customer? I understand that there aretests going on right now. What are you hearing from that customer?

Schmidt: We're working with the corporate customers to do the same thinginside their networks as we do with consumers. Now, corporate customers arenot the same thing as consumer customers. Corporate customers have a muchhigher need for reliability, so we'll sign an agreement that guarantees acertain level of service. But then we charge for it. So that's a case wherepeople are willing to pay for something which is free without the level ofreliability. They also have other needs. They need greater security, for allthe obvious reasons. And they also need better integration with all of theother services that their companies have. This is a long process. It's not afast process. But it's very deeply valuable. And those customers we willhave for 20 or 30 or 40 years as they build into our model. We like thatmodel. It's an enterprise play. It's a business that I've been in for a longtime, and one which will ultimately be very, very lucrative through Google.

Bartiromo: Do you ever look back and think about what has happened to thecompany? I mean, you, for a long time, have been really one of the mostadmired companies out there, and then one of the sexy, sort of big growers outthere. And then as the company got bigger and bigger, people started to getafraid of Google, they way they were afraid of Microsoft at one point as well.Do you worry that that's the perception or that perception could take hold atsome point?

Schmidt: We do worry about perception because we want to make sure thatwe are--that our perception is consistent with the way we way we behave.Google runs on a set of principles, and every company has their ownprinciples. Ours are about doing no evil, it's about trying to serve the enduser. Larry Page, our--one of our founders, wrote a very thoughtful memoabout what it's like to be a big company. So, for example, he authored therule that we'll never trap people's data. So if you become dissatisfied withus, we will make it easy for you to go to our competitor. Most companiesdon't do that. So we're trying to find that balance between the structure ofa company and the need for predictability and so forth with our real mission,which is to serve you as an end user. And if you're not happy with us,keeping you trapped, that's a mistake. We want you to have another choice.

Bartiromo: Final question. Eric, let's face it. Microsoft wants Yahoo!.How much of a disadvantage do you think Google is at if these two players gettogether, what...(unintelligible)...two and third player in the market?

Schmidt: Well, a lot of people debate this. There's a big debate withinthe company. People say, on the one hand, that we stay focused, which, ofcourse, we're very focused, while they're doing their maneuver. On the otherhand, people are concerned about the history, as I mentioned, and thepossibility of merger. So I don't think we really know yet. We debate it allthe time.